FCC Vote Roils Telecom Industry Again

Published 7:00 pm, Thursday, February 20, 2003

This week's Federal Communications Commission vote on phone and Internet competition was supposed to herald a new era of clarity in the turbulent telecom industry.

Instead, the decision revealed an amazing amount of discord within the FCC and spells even more uncertainty for consumers and investors.

The nation's phone giants moaned that the FCC failed to drop outdated rules that let competitors use Bell networks at discounted prices. Consumer groups praised the decision because it preserves the ability of long-distance carriers like AT&T Corp. and WorldCom Inc. to offer local service.

But consumer groups also complained that the phone companies won dangerous power over the future of Internet access, closing out smaller providers and guaranteeing higher prices for residential users.

For now, all that is certain is that the future of communications in America will be played out, once again, in the courts. Congress could step in, but many observers say that appears unlikely anytime soon with so many other issues dominating Washington these days.

"The surprise is not so much that we did not achieve what we hoped to on so many issues," said Thomas Tauke, top lobbyist at Verizon Communications Inc., the nation's biggest phone company. "The surprise is the disarray within the FCC and the resulting lack of a coherent legal and policy philosophy."

The confusion was felt on Wall Street. Shares of the four major phone companies were ravaged after Thursday's FCC vote but rebounded Friday, except for SBC Communications Inc., which fell more than 2 percent.

Shares of Bell rivals also gained Friday, with Sprint's land-line division up more than 3 percent and AT&T stock rising nearly 2 percent.

The FCC was faced with an extraordinarily complex task _ to reconsider, by a court-ordered deadline, its enforcement of the 1996 Telecommunications Act. Two earlier sets of rules had been rejected by federal judges.

One major ruling Thursday was that state regulators will decide where, and at what price, Bells must make parts of their networks available to rivals in order to ensure competition.

This marked an unusual defeat for FCC Chairman Michael Powell, who advocated eliminating the network-sharing requirements altogether. Powell agrees with the Bells that competition for local phone service is vibrant in many forms, including wireless phones, e-mail and cable and Internet technologies. But Republican Kevin Martin, a former campaign aide to President Bush, sided with the commission's two Democrats for a 3-2 majority.

Telecom analyst Phil Jacobson of Network Conceptions LLC said he was surprised that Powell, son of Secretary of State Colin Powell, wouldn't compromise on a position that probably was politically untenable, considering that the existing rules let Bell rivals provide local service on 10 million phone lines.

"It hurts his credibility for really being able to accomplish much," Jacobson said. "It shows that he doesn't just have a self-righteous attitude _ he has a self-righteous attitude even when he's not right."

But other observers called Martin's approach a cop-out.

"We're going to have this hodgepodge of 50 different regulatory fiefdoms, unless the courts strike this all down," said Adam Thierer, director of telecommunications studies at the Cato Institute, a libertarian think tank.

Martin acknowledged Friday that the process had been difficult for the FCC and himself personally. He said no matter how the FCC had voted, it would have been challenged in court.

"If everyone is mad at you, maybe you got it right," he told a Georgetown University conference. "That definitely feels like that's true today."

The FCC did free the Bells from having to make new high-speed fiber-optic lines available to competitors at regulated prices. The Bells had long sought this bit of deregulation, saying it was vital for them to compete better with cable modems and get broadband to more homes.

"Their bluff was called," said Joan Marsh, AT&T's director of federal government affairs. "It's time for them to put their money where their mouth has been for a number of years."

Phone company executives countered that because the FCC didn't do enough to keep their basic landline phone business from shrinking, they won't have the money to invest in new fiber networks.

Still, some analysts said the Bells were given an enormous opportunity to confirm their lock on the "last mile" of wiring to individual homes. Indeed, Covad Communications Co., which leases Bell lines to provide DSL high-speed access, said it might abandon selling to consumers and concentrate only on businesses.

Although emerging wireless technologies can get around the last-mile bottleneck, those have nowhere near the power of fiber-optic lines.

"If the (phone companies) were to play their cards right, we'd get a lot of new services but we'd have to pay through the nose," said independent telecom consultant David Isenberg. "It would become a robber baron-type scenario."